Asos shares drop as sales fall 16%

Investing.com -- Shares of Asos Plc (LON:ASOS ) fell on Tuesday after the online fashion retailer reported a drop in annual sales and profit, even as its adjusted EBITDA reached the upper end of expectations. 

At 4:31 am (0931 GMT), Asos Plc was trading 7.9% lower at £346.3.

The FY24 results show Asos facing considerable challenges across key regions, with group sales for the year declining to £2.9 billion—a 16% drop compared to last year. 

While the company’s EBITDA reached £80 million, higher than analysts' consensus of £72 million, the numbers underscore ongoing struggles with demand, particularly in international markets.

By region, the company saw UK sales fall by 12%, with European sales down by 13%. Conditions were especially tough in the U.S., where sales plummeted 28%, and in other international markets, where sales decreased by 30%. 

Asos has undergone an inventory overhaul to manage these challenges, reducing its stock levels by around 50% since FY22 and cutting aged inventory by 75% over the past year. Now, more than 80% of Asos’s stock is less than six months old.

RBC Capital Markets in a note said that Asos’s updated commercial model, which emphasizes fresh inventory, seems to be gaining traction with customers, as new product sales have risen 24% over the last three months with only a modest increase in inventory levels. 

However, the positive response to fresh stock has been countered by an overall 30% drop in sales of older inventory, as Asos reduced its aged stock levels to improve margins. 

While this has helped stabilize gross margin—up by 120 basis points in the second half of the year after a steeper 260 basis point decline in the first half—analysts suggest that the company still faces hurdles in balancing demand with profitability.

Looking forward, Asos projects sales to vary widely in FY25, from a potential decline of 9% to a growth of 6%. 

However, the company aims to improve profitability, guiding towards a 300-basis point increase in gross margin, which would bring it above 46%, and forecasting a substantial 60% lift in adjusted EBITDA to between £130 million and £150 million. 

RBC Capital Markets analysts also flagged Asos’s plans for capex around £130 million and expected cash interest of approximately £35 million, which should contribute to a more stable free cash flow position, expected to be neutral in FY25.

“We believe there remains a large opportunity to penetrate ASOS' international markets, particularly the US and Europe, where it has local infrastructure and is therefore better able to serve the consumer,” the analysts said.

Source: Investing.com